Illinois comptroller pitches rating agencies for upgrades

A dwindling backlog of unpaid bills and budget proposals that bolster a meager rainy day fund and supplement pension contributions support Illinois’ case for rating upgrades, Comptroller Susana Mendoza argues in a letter to rating agencies.

“I believe Illinois is due to be recognized for our current achievements and plans to further strengthen our financial situation, and I believe these are strong indicators that favor upgrading Illinois’ credit rating,” Mendoza’s letter says.

Illinois has the lowest ratings of any state: Baa2 from Moody's Investors Service, BBB from S&P Global Ratings and BBB-minus from Fitch Ratings.

Mendoza pointed to the early payoff in January of the state’s $2 billion, three-year Municipal Liquidity Facility loan taken out in December 2020 and plans to pay off a remaining $719 million in short-term, inter-fund borrowing used to manage COVID-19 expenses by the end of fiscal 2022 June 30.

Illinois brought down its bill backlog to $3 billion last year and that’s held steady. “That Illinois has held steady in paying its bills should help ease concerns that the reduced backlog amount was just a temporary accomplishment,” Mendoza, whose office manages bill payment, said in the letter to rating agencies.

The backlog hit of high of more than $16.7 billion in 2017 due to the state’s two year budget impasse.

Mendoza then turns her sights to Gov. J.B. Pritzker’s budget proposals, which earmark a portion of higher-than-expected tax revenues to fund a $500 million supplemental pension contribution and $1.3 billion to pay down bills. That includes $898 million to pay off the backlog of employee and retiree health insurance-related bills that would allow the state to meet a routine bill cycle.

“As you know, the governor’s plan is aimed at improving the state’s structural budgetary challenges with its group insurance program and state pensions,” Mendoza writes in the Feb. 4 letter, made public Monday, to the lead Illinois analysts at Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings.

Pritzker would also deposit $879 million in the state’s empty rainy day fund.

Mendoza sent a similar pitch to rating agencies in July at the start of the fiscal year providing analysts with an update that came soon after Moody’s Investors Service upgraded the state to Baa2 from Baa3 in June.

S&P Global Ratings followed Moody’s later in the summer by raising the state’s rating to BBB from BBB-minus. Fitch moved its outlook to positive from negative but left the rating at BBB-minus. S&P late last year then moved the state’s outlook to positive. Moody's assigns a stable outlook.

Mendoza also noted the state’s improved market performance as a sign that investors view the state as being on the upswing. The state captured the lowest yield penalties — a 54 basis point spread to the Municipal Market Data’s AAA benchmark on its 10-year — in recent memory with its November issue.

Investors attribute that more to market demand last year for higher yielding paper and the cushion provided by the state’s $8 billion American Rescue Plan Act funding than to a long-term endorsement of the state’s fiscal health.

In the secondary, the state’s 10-year was at a 63 bp spread to AAA at the start of the year. It widened to 68 bp by the end of January and has been as high as 71 bp amid rockier market conditions.

Pritzker's proposed budget last week drew positive remarks from the rating agencies in analyst interviews with The Bond Buyer but it remains unclear how soon those measures, if adopted, might trigger positive rating actions and whether they can win upgrades on their own.

“There are some proposals in the executive budget that clearly target the state’s biggest credit challenges,” said Eric Kim, Fitch’s lead analyst on Illinois.

Analysts offered praise but cautioned that Pritzker’s proposals are far from final and their eyes also remain on the state’s long-term trajectory, a signal that the state faces hurdles moving up the ratings scale unless it does more to deal with its burdensome $139.9 billion of unfunded pension liabilities.

While the Pritzker administration labeled its budget balanced, that’s on a cash basis, and analysts said a deeper review is needed before assessing where the budget stands structurally. They also note that the budget's additional pension contributions still fall well short of actuarially based pension funding.

Both Pritzker and Mendoza are Democrats who are seeking re-election in November.